Dear Driving for Dollars,
I just financed my first car. It’s a five-year loan. What’s the best way for me to save money on the car loan? Should I refinance or should I just add extra to the principal each month?
Refinancing your car loan is one way to reduce your overall car loan costs and save money, but it only works well if you can refinance and reduce your interest rate by at least 2 percent — and ideally a lot more. There are also restrictions on whether you qualify for a refi based on the age and value of your car as well as how much you owe. You may not be able to qualify for a refi if you owe too little or too much, if your car is more than five years old or if it’s worth less than you owe.
Because you recently bought this car and it sounds like you have extra money, your best bet is simply to add more to your principal with each car payment. This will save you in interest payments and allow you to pay off your car loan sooner. To see how much you’ll save, use Bankrate.com’s early payoff calculator.
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